With rates near zero, markets await Fed's macro view

Once upon a time, Federal Reserve Board meetings inspired intense speculation about the future direction of benchmark interest rates. There's no such suspense surrounding this week's meeting, however. The Fed Funds rate -- what banks charge each other for overnight loans -- has been as close to zero as it can get since December. With no sign of an end to the recession in sight, it's extremely unlikely the Fed will vote to raise it.

Instead, Fed watchers will be listening for a couple of subtler sounds.

First, they'll surely be very sensitive to anything the central bankers have to say about the direction of the economy. Fed Chairman Ben Bernanke didn't mince words during his appearance on 60 Minutes last weekend, confidently asserting that "we'll see recovery beginning next year." The statement released at the end of tomorrow's meeting will be a lot more detailed.

Any positive sentiments may spur investors to push stocks higher. It'll probably also lead some economic commentators to question the Fed's credibility given the seemingly endless stream of bad news about jobs and industrial production. On the other hand, housing starts last month rebounded from the record-low levels they reached in January. And wholesale prices moved a hair higher. How will the Fed balance these pieces of information?

The second development observers will be watching for is the Fed's assessment of inflationary pressures. If deflation looms, the board may signal they'd be open to buying long-term U.S. government debt as a way to inject money into the economy. "Outside of discussing the current economic situation and reviewing all their facilities and the effectiveness of them, the only other major thing left to consider is whether or not to buy long-term U.S. Treasuries," wrote money manager and financial blogger Barry Ritholtz at The Big Picture.

Other alternatives include expanding the Fed's existing facility for buying debt backed by Fannie Mae and Freddie Mac or beginning to purchase corporate bonds, as Bloomberg News reported. (Paul Krugman, the New York Times columnist and Nobel Prize winner in economic, questions whether the Fed could spend enough to accomplish anything.)

Buying Treasuries will increase the price of long-dated government bonds and lower their yield. That would make it less expensive to finance future government spending. It might also reduce what consumers pay to borrow, since mortgage rates are linked to Treasuries.

But there are risks, too. Critics of such a move say the Fed could spur painfully high inflation by trying to stave off deflation this way.

Expect both the Fed and its closest observers to weigh in on these issues Wednesday.